Different types of Buy Now, Pay Later
Quick insights
- Buy Now, Pay Later (BNPL) enables shoppers to split purchases into smaller payments.
- Common BNPL formats include pay-in-4 plans, short-term loans, deferred payment options and retailer-specific programs.
- BNPL services can be offered by third-party providers, banks or credit card issuers.
Buy Now, Pay Later (BNPL) has become an increasingly popular payment option. As BNPL options increase, knowing the ins and outs of how these services work may help consumers make more informed decisions about their purchases.
Let’s break down what BNPL is, different types of plans and some tips when considering if a BNPL plan is right for you.
What is Buy Now, Pay Later?
BNPL is a type of short-term financing that allows buyers to divide their purchase into installments. Instead of paying the full amount at once, the buyer commits to scheduled payments over weeks or months.
BNPL plans may require a soft credit check during the approval process. Depending on the plan, they may need to make an initial down payment, usually around 25% of the purchase price. The consumer repays the remaining balance in a series of scheduled installments, typically via automatic deductions.
Note that missing payments on BNPL plans could lead to late fees and that some plans may include other fees too. Some providers may also report late or missed payments to credit bureaus, which can affect your score.
Common BNPL payment types
Not all BNPL plans are the same. Here are some common payment types you’re likely to see:
Pay-in-4 installment plans
A pay-in-4 plan is one of the most common BNPL types. It is often associated with smaller purchases.
Pay-in-4 plans split a purchase into four equal payments, with payments typically due every two weeks. The first payment is usually made at checkout, and the next three are automatically charged at set intervals.
Short-term loans
Short-term loans are BNPL plans typically offered for slightly larger purchases, like furniture or appliances. Repayments may span several months. Note that approvals for these loans may require a hard credit check, and longer loan terms could trigger higher fees.
Store-specific BNPL services
Some retailers run their own BNPL programs. However, this practice is increasingly less common as most retailers opt to provide BNPL through third-party service providers.
Store-specific services may be tailored specifically for that store’s purchases, sometimes offering unique discounts or loyalty rewards. They also may include promotional rates and special BNPL terms for frequent shoppers.
Types of BNPL service providers
Just as there are different types of BNPL payment plans, there are also different types of BNPL service providers. A few common ones include:
Dedicated BNPL platforms
These third-party services partner directly with retailers (both online and in-store) to offer their services at checkout. They usually specialize in the fixed-installment repayment model, which allows customers to split purchases into multiple payments over a short period.
When a customer chooses this service at checkout, they are typically redirected to the provider's platform to complete the approval process. If approved, they can complete the purchase with a BNPL plan. The provider pays the merchant upfront, and the customer repays the provider.
Bank or credit card company BNPL plans
Traditional financial institutions often allow their existing cardmembers to pay eligible purchases with installment plans. These can sometimes be "pay over time" plans that might accrue interest after an initial grace period, or they might offer fixed installments with fees.
Instead of a third-party provider, the bank or credit card issuer itself offers the installment option, either during the transaction at checkout or after a purchase has been made.
How to compare BNPL plans
When choosing a BNPL plan, you may want to consider the following factors:
- Repayment terms: Consider the loan duration and individual payment amounts to see if they align with your budget and income schedule.
- Interest and fees: You may want to confirm rates, especially for longer terms, and check if you are subject to late fees or penalties for early repayment.
- Purchase limits: Understanding BNPL spending limits, which vary by provider and your credit history, can help you determine if the plan covers your purchase.
- Approval process: Most BNPL services use soft credit checks, but some larger plans may involve hard inquiries that can impact your credit score.
- Return and refund policies: How returns and refunds are processed can sometimes be complicated with BNPL plans, so it can help to check refund policies before making a purchase.
In summary
BNPL offers a way to manage purchases by splitting the total cost into smaller, scheduled payments. There are various forms of BNPL, including common pay-in-4 plans for smaller purchases and short-term loans for larger purchases. Some retailers also may offer their own store-specific programs. When considering a BNPL plan, you may want to evaluate the repayment terms, potential interest and any associated fees for late payments.
